Brazil Goes Easy on Wealthy Tax Dodgers to Help Plug Budget Gap

  • As much as $400 billion may be hidden in offshore accounts
  • Brazilians stepping up to pay taxes or face possible prison

A 70-something corporate lawyer in Sao Paulo’s financial district is ready to come clean with a secret that’s weighed on him for decades: He owns $200,000 in undisclosed cash illegally stashed abroad.

He’s not alone. Well-to-do Brazilians have hidden as much as $400 billion in offshore accounts from the nation’s tax authorities -- and not always for nefarious reasons. It’s not uncommon that an otherwise law-abiding Brazilian of a certain age and professional standing would have sheltered at least some assets abroad, motivated by five currency failures since the 1970s, hyperinflation starting in the 1980s and bank-account seizures in the 1990s.

Now, in a bid to raise cash amid a crippling budget deficit, the government is giving these wealthy tax dodgers a one-time take-it-or-leave-it offer: Come forward, pay a tax and a fine, and the slate will be wiped clean. Against the backdrop of political crisis following the vote of Brazilian legislators to impeach President Dilma Rousseff, a corruption crackdown at home and tighter banking restrictions abroad, many Brazilians have concluded the amnesty deal isn’t so bad.

“These days people are being held responsible, they can go to jail,” said Alessandro Fonseca, a partner at Mattos Filho, Veiga Filho, Marrey Jr. & Quiroga Advogados, a well-known Brazilian law firm. “There’s this feeling that ‘Wait, this is serious -- I better pay attention.’”

The six-month window to apply for amnesty opened April 4, and more than half a dozen advisers and private bankers said in interviews that demand has been so strong it’s fueling a growing market among lenders and law firms for their services. As a result they’re predicting the program could turn out to be a much bigger windfall for the government than had been anticipated. 

“People, for whatever reason, have this money parked abroad. That’s a fact -- and that fact is a crime,” said Ana Cecilia Manente, who helped revise the law as a partner at Levy & Salomao in Sao Paulo. “Based on the number of people I’ve heard from, I’d say about 90 percent of them will participate.”

The finance ministry expects the legislation, signed into law in January with little fanfare, to raise about $10 billion for government coffers -- still just a dent in Brazil’s enormous $175 billion budget hole. But should Brazilians declare even half of the illegal cash that’s estimated to be sitting offshore, it would generate a bonanza big enough to cover almost a quarter of the shortfall, about 160 billion reais or about $45 billion at current exchange rates, according to Bloomberg calculations.

Data Swap

Adding to the pressure to step forward is the specter of increasingly linked financial systems. Last year, Brazil joined efforts led by Western governments to shed greater light on offshore banking centers that can be used to avoid taxes and hide illicit funds. Brazil started exchanging financial information with the U.S. in October and plans to swap similar data with members of the Organization for Economic Cooperation and Development and other countries starting in late 2018.

Global Financial Integrity, a Washington-based group that studies international financial flows, estimates that Brazilians illicitly squirreled away just over $400 billion in overseas accounts between 1960 and 2012. In a separate report, the group ranked Brazil as the sixth-biggest source of illicit capital among emerging markets.

Federal prosecutors investigating the corruption scheme at state-run oil giant Petroleo Brasileiro and top builders say at least 21.8 billion reais ($6.3 billion) was illegally siphoned from public projects, with much of it sent abroad.

October Deadline

To qualify for amnesty, account holders have until October to show the cash they hold abroad was legitimately earned and doesn’t stem from corruption, trafficking or any other illegal activities. Politicians and current public servants can’t apply -- an especially telling footnote in a country rife with accusations that top lawmakers colluded in the Petrobras scandal.

The Sao Paulo lawyer, a former public official, said he earned his overseas cash from corporate consulting work he did 15 years ago. When the client insisted on paying his fee using offshore accounts because of liquidity problems at home, he said he reluctantly agreed but didn’t alert tax authorities and has fretted about it ever since. For him, the fine and belated tax -- about $45,000 on his $200,000 holdings -- is a small price to pay for finally getting on the right side of the law.

That seems to be the consensus view among wealthy Brazilians.

“I haven’t talked about anything else since the law was signed by the president,” said Fonseca, the Mattos Filho partner. “It’s a unique opportunity for anyone who has undeclared assets abroad. Really, for them, there’s no other alternative.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE